Vista Delay Hurts Microsoft Profits

The long-delayed launch of the Windows Vista operating system cut into fiscal second-quarter profits at Microsoft Corp., which reported a 28 percent drop in earnings Thursday despite decent revenue growth.

In the last three months of the year, earnings fell to $2.63 billion, or 26 cents per share, from $3.65 billion, or 34 cents per share, during the same period last year.

Analysts polled by Thomson Financial expected the Redmond, Wash.-based software maker to post a profit of 23 cents per share.

Revenue rose to $12.5 billion, a 6 percent gain from $11.8 billion in the year-ago quarter. Analysts were expecting just shy of $12.1 billion in sales.

Microsoft shares fell 64 cents, 2.1 percent, to close Thursday at $30.45 on the Nasdaq Stock Market, ending an uneven day in which the stock also hit a 52-week high of $31.48. In extended trading after the earnings release, the stock was back up to $31.45.

Although Windows Vista and Office 2007, the latest editions of Microsoft's flagship products, do not hit the consumer market until Tuesday, they have been available for businesses since Nov. 30, two-thirds of the way through the company's second quarter.

Even so, Microsoft's "client" division, responsible for Windows, posted a 25 percent drop in sales to $2.59 billion. And the business division, which includes Office, saw a 5 percent drop to $3.51 billion.

The falls were expected, because Microsoft had warned that it would be deferring $1.6 billion in Windows and Office revenue from the second quarter to the current period. That was done to account for coupons that recent computer buyers could use to upgrade existing software to Vista and Office.

In addition to the revenue deferral, Microsoft's profits were trimmed by $1.13 billion, or 11 cents per share, because of the upgrade-coupon program.

A huge reason for Microsoft's overall revenue gain was the performance of the entertainment and devices division, which includes the Xbox 360 video game console. That unit saw revenue hit $2.96 billion, a 76 percent jump. The unit lost $289 million, however, roughly even with last year.

Microsoft also updated its outlook but appeared to give analysts little reason to alter their expectations.

In the current quarter, Microsoft predicts earnings of 45 cents to 46 cents per share on $13.7 billion to $14 billion in revenue, helped by the deferrals from the second quarter. Analysts already were expecting 46 cents per share and $14 billion in revenue, according to Thomson Financial.
For the full fiscal year, which ends June 30, Microsoft foresees earnings of $1.45 to $1.47 per share, with revenue of $50.2 billion to $50.7 billion. That was slightly ahead of the estimates already held on Wall Street: $1.45 per share and revenue of $50.5 billion.

For the first half of its fiscal year, Microsoft earned $6.10 billion, 61 cents per share, on revenue of $23.4 billion. In the comparable period a year earlier, Microsoft's profit was $6.79 billion, 63 cents per share, with revenue of $21.6 billion.